Mutual Fund Investment: If Not Multi-cap Funds, Which Category Should You Choose? 

The equity category with the highest AUM is large-cap as market growth is being driven by a few large-cap stocks and people have confidence in proven, large businesses.

The issue about multi-cap funds is that from the Securities and Exchange Board of India’s (SEBI) perspective, if a fund is multi cap, it should be true to label and there should be somewhat equitable allocation to the large, mid and small-cap stocks. From the fund managers’ and investors’ perspective, the market cap in India, which is a reflection of the value the market is assigning, is skewed towards large-cap stocks. In that sense, it is justified that even in multi-cap funds allocation is skewed towards large-cap stocks.

There is a debate raging, how much sell-off of large-cap stocks would ensue from multi cap funds, to make room for purchase of small cap-stocks by January 2021. In this backdrop, it is advisable that investors go slow on fresh investments in multi cap funds. Nothing to panic or withdraw in haste, but just to go slow on fresh investments. And then, if not multi-cap funds, which category to choose?

Implied market allocation to categories
One approach is to discuss the merits and demerits of the various categories. But then, these have been discussed many times till date. Let us look at the AUM in various categories, which conveys the message of the market: the relative importance of that category. As on August 31, 2020, the equity category with the highest AUM was large-cap, with Rs 1.49 lakh crore. This is understandable, as the market growth is being driven by a few large-cap stocks for quite some time, and people have confidence in proven, large businesses.

The category with the second highest AUM is multi-cap, with Rs 1.46 lakh crore, which is going through the phase mentioned earlier. The third highest is ELSS, which has the added advantage of tax benefit under Section 80C of the Income Tax Act. The fund manager has a free hand in ELSS, without any stipulation such as a minimum percentage in small-cap stocks. The quantum here is Rs 98,000 crore. After ELSS, we have mid-cap funds with Rs 88,000 crore. That gives you a perspective, in terms of AUM assigned by the market, that the significant categories other than multi-cap are large-cap, mid-cap and ELSS.

Other categories to consider
ETFs are gaining popularity nowadays, as you can buy into an ETF of the category you prefer, i.e. defined investments; expenses are lower than actively managed funds and of late, actively managed funds are not providing the performance alpha. That makes the case for ETFs, where the fund manager does not have much of a role anyway.

The only difference between the regular mutual fund schemes and ETFs, from an investor’s perspective, is that purchase and redemption is not with the AMC but in the secondary market, through a broker. Nowadays transactions can be easily executed online, through online broking. Another proxy for multi-cap funds could be large-and-mid-cap funds, with an AUM of Rs 57,000 crore as at the end of August.

From a broad perspective, it is required that small cap companies grow, along with large and mid-sized ones, because the corporate sector and the economy as a whole has to grow. Having said that, from your point of view, small-cap companies could be more volatile as these do not have the ‘margin of safety’ of the larger ones. If you do not feel comfortable, you need not invest in small-cap companies / funds and can allocate your money to the proven companies. As long as you have a judicious allocation to well-managed equity funds, your portfolio will grow along with the growth of the Indian economy.


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